World equity and bond markets fell in recent weeks, and although equities have recovered somewhat since, the episode is a reminder that expensive equity, bond, and bond-proxy prices are at risk from the end of ultra-low cash and bond yields. On a brighter note, the world economy has been strengthening and the improved cyclical outlook will assist growth-oriented assets. In New Zealand, the current business expansion has further to run, but the pace of growth has slowed down and growth asset valuations may be overstating likely profit growth.
New Zealand Cash & Fixed Interest
Short-term interest rates are once again unchanged in line with the unchanged monetary policy setting of the Reserve Bank of New Zealand: 90-day bank bill yields remain close to 1.9%. Longer-term yields have followed overseas yields higher, with the 10-year government bond yield now at 2.99%. The New Zealand dollar is up 1.7% in overall trade-weighted value for the year to date, mainly because of a rise against the U.S. dollar, from USD 71 cents to just shy of 74 cents.
In the latest Monetary Policy Statement of Feb. 8, the RBNZ reiterated that it is likely to keep the OCR on hold all the way to late 2019 and forecasters are also coming round to this view particularly in the light of inflation running lower than previously expected.
A global equity sell-off partly caused by rising bond yields is a difficult set of circumstances for property shares anywhere, and New Zealand shares have been no exception. Local REIT prices had been gently sliding in any event--the S&P / NZX All Real Estate had dropped by 2.2% between its recent Dec. 19, 2017, peak and Feb. 2, 2018--but the subsequent global bearishness saw the sector sell off further again. For the year to date, the index is now down 4.9% in capital value.
The S&P / ASX200 A-REITs Index is also showing a capital loss of 8.6% and an overall loss including dividend income of 7.8%.
It was the same underperformance story overseas: For the year to date, the FTSE EPRA/NAREIT Global Index has registered a 3.9% loss in terms of net return in U.S. dollars, compared with the 1.9% gain for the MSCI World Index on the same basis.
The New Zealand share market missed out on the rise in global equity prices in January--it was essentially unchanged for the month--but unfortunately the same was not true on the downside, with local shares following global equities down in February. For the year to date, the S&P / NZX50 Index is down by 3.3% in capital value and by 3.2% in terms of total return including dividends.
The Australian market has also suffered, with the S&P / ASX200 Index down by 2.7% in capital value and by 2.4% after including dividends.
International Fixed Interest
The bond markets, particularly in the U.S., have played a key role in the recent global financial market volatility. In the U.S., the key benchmark--the yield on the 10-year U.S. Treasury bond--is now almost a full half a percent higher since the start of the year, having risen from 2.4% to just under 2.9% (currently 2.88%). Other than in Japan, where monetary policy remains set on highly supportive, bond yields elsewhere have also risen: The 10-year government-bond yield in Germany, for example, is up by a fourth of a percentage point to 0.7%, and in the U.K., the equivalent yield is up 0.4% to 1.6%. The Swiss 10-year yield, which last year was negative, has moved further into positive territory (now 0.16%). Investors in fixed interest have consequently faced difficult conditions.
After a strong start to the year, global sharemarkets have been volatile in recent weeks, with the American market being the catalyst: It was especially weak in early February, when the S&P500 dropped by 8.5% between Feb. 1 and Feb. 8. Most other developed markets followed it down over the period. Ironically, the cause of the sell-off has recovered in recent days, with the S&P 500 now up 2.2% for the year to date, but several of its collateral casualties elsewhere are still in the red for the year (Germany’s DAX down 3.6%, Japan’s Nikkei down 4.6%, and the U.K.’s FTSE100 down 5.1%). For the year to date, the developed markets in the MSCI World Index are marginally up (0.15%) measured in their own currencies and up 1.6% in U.S. dollar terms because of the weakness of the USD.
Emerging markets encountered even more-severe turbulence, with the MSCI Emerging Markets in USD terms dropping by 10.2% between Jan. 26 and Feb. 9. Since then, however, prices have shown considerable resilience, and the emerging markets index in USD is now up 3.6% for the year to date. Brazil and Russia have accounted for the bulk of the gain, with prices little changed in India and weaker in China.
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